Question

The

Sundance

Corporation manufactures cellular modems. It manufactures its own cellular modem circuit boards​ (CMCB), an important part of the cellular modem. It reports the following cost information about the costs of making CMCBs in

2017

and the expected costs in

2018​:

Current Costs

Expected Costs

in 2017

in 2018

Variable manufacturing costs

Direct material cost per CMCB

$190

$188

Direct manufacturing labor cost per CMCB

25

27

Variable manufacturing cost per batch for setups, materials

handling, and quality control

1,750

1,700

Fixed manufacturing cost

Fixed manufacturing overhead costs that can be avoided if CMCBs

are not made

665,000

170,000

Fixed manufacturing overhead costs of plant depreciation,

insurance, and administration that cannot be avoided even if

CMCBs are not made

855,000

850,000

manufactured

9,500

CMCBs in

2017

in

50

batches of

190

each. In

2018​,

Sundance

anticipates needing

17,000

CMCBs. The CMCBs would be produced in

100

batches of

170

each. The

Mobey

Corporation has approached

Sundance

about supplying CMCBs to

Sundance

in

2018

at

$350

per CMCB on whatever delivery schedule

Sundance

wants.

1.

Calculate the total expected manufacturing cost per unit of making CMCBs in

2018.

2.

Suppose the capacity currently used to make CMCBs will become idle if

Sundance

purchases CMCBs from

Mobey.

On the basis of financial considerations​ alone, should

Sundance

make CMCBs or buy them from

Mobey​?

Show your calculations.

3.

Now suppose that if

Sundance

purchases CMCBs from

Mobey​,

its best alternative use of the capacity currently used for CMCBs is to make and sell special circuit boards​ (CB3s) to the

Elle

Corporation.

Sundance

estimates the following incremental revenues and costs from​ CB3s:

Total expected incremental future revenues

$1,800,000

Total expected incremental future costs

$1,920,000

On the basis of financial considerations​ alone, should

Sundance

make CMCBs or buy them from

Mobey​?

Show your calculations.

Answer 1

1) Calculate the total expected manufacturing cost per unit of making CMCBs in 2018.
	Total Manufacturing Costs of CMCB ( 1)	Manufacturing Cost per Unit (2) = (1) ÷ 17,000
Direct materials,  $188 x 17,000	$                  3,196,000.00	$                     188.00
Direct manufacturing labor,  $27 x 17,000	$                     425,000.00	$                       25.00
Variable batch manufacturing costs,  $1,700  x 50	$                       85,000.00	$                         5.00
Fixed manufacturing costs		$                             -
Avoidable fixed manufacturing costs	$                     665,000.00	$                       39.12
Unavoidable fixed manufacturing costs	$                     170,000.00	$                       10.00
Total manufacturing costs	$                  4,541,000.00	$                     267.12